Debt Settlement can constitute an alternative to filing for bankruptcy and should be taken into account when considering your possibilities if you’ve run into financial troubles. However, debt settlement truly is an aggressive approach to a debt elimination process and thus, also has some negative short term consequences. Nevertheless, as compared to bankruptcy the negative inputs on your credit report are completely manageable and you’ll be able to recover a lot sooner. Remember that a past bankruptcy entry remains on your credit report for up to 10 years.

Why Does Debt Settlement Work?

What lenders and other creditors want is to at least recover their investment. Thus they would most certainly prefer to settle for a lower amount than to risk the borrower to file for bankruptcy and maybe get nothing at all. However, creditors will want to get as much money as possible and will present a hard negotiating position so as to achieve this goal.

That’s why a debt settlement program should be carried out by professional negotiators. Negotiators know exactly how to deal with creditors and obtain higher waives on the claimed debts. Debt settlement experts know exactly how long they can push so as to make creditors give up a larger portion of the outstanding debt and thus enhance your financial situation.

Debt Eliminated Equals Taxable Income?

There is however, a problem with debt elimination that has to be taken into account when undertaking debt settlement. When debt is forgiven, it’s just like getting an additional income that was not expected. The IRS considers forgiven debt to be taxable and thus in most cases by the end of the fiscal period, you’ll have to pay income tax on that.

Though in almost every situation, eliminated debt equals taxable income and has to pay taxes, there are some situations in which special deductions can be made. If the financial situation of the borrower is particularly complicated, there is a special form that can be filled claiming excessive hardship that can waive the payment of the income tax on eliminated debt.

Short Term Consequences On Credit Score

During a debt settlement process there are some consequences that are inevitable. The credit history of the debtor will show unpaid balances and missed payments on various debts till all of it is finally settled. Thus, the credit score of the debtor will suffer greatly. All through the first phase of the debt settlement process the client’s credit score can drop dramatically.

This is due to the fact that creditors have to keep informing the state of the debts and open credit lines. Yet, after the debt settlement process is completed, the creditor can be obliged to notify that the debt was canceled. Nevertheless the report will show that debt was settled or that it was settled for less than the full amount which will remain in your credit report showing that you resorted to debt settlement services.